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Nitesh Shah

Director Commodity Strategist


Maxwell Gold
Director - Investment Strategy

ETF Securities Outlook

December 2016

2017 Commodity Outlook


Summary

Individual commodities trade on their own fundamentals.

Near-term pressure on gold and silver to give way as inflation


rises faster than interest rates.

Oil to continue range bound trading in first half until visible


signs of production cut-backs emerge.

Short-term correction in industrial metals to precede gains,


while La Nia to place pressure on agricultural prices

Commodities to trade on own fundamentals


While many group commodities as one asset class, in reality each
commodity trades on its own fundamentals. Historic correlation
between commodities has been relatively low. In this outlook we
will provide an overview of our views on major commodities within
each sub-category.

Commodity correlation matrix


Precious
Metals
Precious
Metals
Energy

1.00

Energy

0.23

Industrial
Metals

0.38

Agriculture

the curve and inflation will rise faster than the central bank will
raise rates, keeping real rates very low. According to the Feds latest
dot-plot of its committee members assessment of appropriate
policy settings, the Fed is only likely to raise rates twice in 2017.
Low real rates are gold price positive. We believe that golds fair
value is between the $1400-1450/ounce range.
Silver has a close correlation with gold and hence we expect silver
prices to rise. In contrast to gold, which trades like a currency, the
physical supply and demand for silver also drives the silver price.
Factoring in the decline in mining investment and rising industrial
activity, we estimate silvers fair value in the $22-24/ounce range.
Speculative positioning in gold and silver has retreated from highs
reached in July, but they remain elevated as investors seek a hedge
against geopolitical risk. The Italian constitutional referendum, the
French Presidential election and the German parliamentary
elections are some of the items on the calendar for the coming year.
When and if the United Kingdom (UK) will start the process of
leaving the European Union (EU) has still not been resolved. Rising
populism poses a threat to stability and investors will look to hedge
this risk.

0.29

Gold and silver net speculative positioning


0.23

1.00

0.34

0.24

Gold

Industrial
Metals

0.38

0.34

1.00

0.37

Silver

Agriculture

0.29

0.24

0.37

1.00

Source: Bloomberg, ETF Securities, as of 31 October 2016. Correlation on monthly


returns of Bloomberg Commodity Index sub-components from 10/01/96 to 10/31/16.

Gold and silver: near term pressure, medium


term strength
We believe the US Federal Reserve (Fed) is still on track to raise
rates in December 2016. Although there was a degree of political
uncertainty in the run-up to the Presidential election, Trumps progrowth policies are likely to be inflationary. In the short-term, gold
and silver prices are likely to come under pressure as we approach
the rate hike. However, we believe that the Fed will remain behind

z-score

2
1
0
-1
-2
-3
1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Source: Bloomberg, ETF Securities. Chart data from 03/31/96 to 11/15/16

Oil market still on path to balance


We believe that oil will continue to trade in the $40-55/bbl (barrel)
range until visible signs of a production cut-back emerge. The
market is coming closer toward a supply-demand balance, but the

Past performance is no guarantee of future results.

path will be bumpy. Close to $1 trillion of investment cuts in the oil


and gas industry since the start of the oil price crash that began in
November 2014 will start to bite into supply in 2017.

Global oil balance


2.5

Industrial metal correction on horizon?

Forecast

130

1.5

125

1.0

120

Price lev el, indexed at 1 00

Millions of barrels per day

2.0

weeks. Since not a lot has changed for the metals from a
fundamental perspective, we fear that part of the gains reflects a
speculative frenzy originating from China that could correct in the
short-term.

0.5
0.0
-0.5
-1.0
-1.5

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Source: International Energy Agency, ETF Securities as of close 08 November 2016


We assume OPEC tapers its production down to 33 mb/d by Q2 2017

115
110

Aluminum
Copper
Zinc
Nickel
Lead
Tin

105
100
95
90
Sep 16

Oct 16

Nov 16

Source: Bloomberg, ETF Securities as of close 25 November 2016

OPEC (Organization of Petroleum Exporting Countries) has also


agreed to cut production back to 32.5-33 million barrels (mb) per
day of production, down from 33.4mb of production in September
2016. However, OPECs commitment is contingent on the
participation of non-OPEC countries. Preliminary meetings
between OPEC and several non-OPEC members have not shown
any progress toward yielding a positive result. Large non-OPEC
members such as Russia, Brazil and Kazakhstan are seeing new
production come online as a result of investment put in many years
ago. There are also a large number of OPEC countries looking for
exemptions from participating in production cuts, placing the
burden on countries like Saudi Arabia and other Gulf Cooperation
Council members.
Notwithstanding these difficulties, should OPEC manage to agree
on how to apportion the cut at its November 30th meeting and stick
to the quota thereafter, we could see the market come to balance as
early as Q1 2017. But we believe that it will take until Q2 2017 for
OPEC to taper production down to 33mb and the market will
balance in Q3 2017.
The US will continue to be price responsive. With short-term
breakeven prices for shale oil at around $40/bbl we expect to see
expansion in US production, which will limit upside on prices to
$55/bbl in the first half of the year. President Elect Trumps pledge
to pursue energy independence could see US oil production rise.
However, it is a 6-year goal and the necessary policy changes to
increase production this year may not emerge.
When we see sustained cuts to production in the second half of
2017 and production deficits eat into elevated inventories, oil prices
are likely to trade above $55/bbl.

Industrial metal correction before next rally


Industrial metals have had a strong rally in 2016 as supply deficits
have become more widely recognized. Even copper, which had a
lackluster first half of the year, has been rising sharply in recent

Ahead of the 19th National Congress of the Communist Party of


China to be held in Autumn 2017, Chinese authorities will seek
political stability. That could mean that the reform agenda could
take a back-seat and over-production of several metals could
persist in China.
Growing populism elsewhere is likely to increase spending on
infrastructure which will boost demand for industrial commodities.
For example, President Elect Trump has pledged up to a $1 trillion
infrastructure spend (financed through a combination of tax credits
and private sector borrowing). We believe that this will drive
industrial metal prices higher after the short-term correction that
we mentioned above takes place.
Other political risks may also impact industrial metal prices. The
Philippines recent threat of banning ore exports is one of them.
However, President Dutertes relationship with the US is likely to
improve under a Trump administration and its new political
alignment with China will likely keep ore exports flowing, at least to
its largest consumers.

La Nia to provide better agricultural growing


conditions
A La Nia weather pattern is expected to emerge which will provide
cooler temperatures during the Southern Hemisphere summer and
reduce heat damage for Arabica coffee, corn and soybean. Current
rains have produced a good flowering of coffee bushes in Brazil,
setting up for a good crop this year.
Better snow cover in North America during La Nia could also
benefit winter wheat growing. Normal levels of rain in India has
refilled resevoirs (following the failed monsoon the previous year).
Such beneficial conditions will help reduce the sugar production
deficit. The EUs scrapping of the sugar prodution quota in October
2017 will increase the supply of sugar beet in Europe and reduce
the demand for raw cane sugar, which will also weigh on prices.

Past performance is no guarantee of future results.

Important Information
The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of
future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would
be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.
The ETFS Silver Trust, ETFS Gold Trust, ETFS Platinum Trust, ETFS Palladium Trust and Precious Metals Basket Trust are not
investment companies registered under the Investment Company Act of 1940 or a commodity pool for purposes of the
Commodity Exchange Act. Shares of the Trusts are not subject to the same regulatory requirements as mutual funds. These
investments are not suitable for all investors. Trusts focusing on a single commodity generally experience greater volatility.
Commodities generally are volatile and are not suitable for all investors. Trusts focusing on a single commodity generally experience
greater volatility. Please refer to the prospectus for complete information regarding all risks associated with the Trusts. Shares in the Trusts are not
FDIC insured and may lose value and have no bank guarantee.
The value of the Shares relates directly to the value of the precious metal held by the Trust and fluctuations in the price could materially adversely
affect investment in the Shares. Several factors may affect the price of precious metals, including:

A change in economic conditions, such as a recession, can adversely affect the price of the precious metal held by the Trust. Some metals
are used in a wide range of industrial applications, and an economic downturn could have a negative impact on its demand and,
consequently, its price and the price of the Shares;
Investors expectations with respect to the rate of inflation;
Currency exchange rates;
interest rates;
Investment and trading activities of hedge funds and commodity funds; and
Global or regional political, economic or financial events and situations. Should there be an increase in the level of hedge activity of the
precious metal held by the trust or producing companies, it could cause a decline in world precious metal prices, adversely affecting the
price of the Shares. Should there be an increase in the level of hedge activity of the precious metal held by the Trusts or producing
companies, it could cause a decline in world precious metal prices, adversely affecting the price of the shares.

Also, should the speculative community take a negative view towards the precious metal held by the Trusts, it could cause a decline in prices,
negatively impacting the price of the shares. There is a risk that part or all of the Trusts physical precious metal could be lost, damaged or stolen.
Failure by the Custodian or Sub-Custodian to exercise due care in the safekeeping of the precious metal held by the Trusts could result in a loss to
the Trusts.
The Trusts will not insure its precious metals and shareholders cannot be assured that the custodian will maintain adequate insurance or any
insurance with respect to the precious metals held by the custodian on behalf of the Trust. Consequently, a loss may be suffered with respect to the
Trusts precious metal that is not covered by insurance.
Commodities generally are volatile and are not suitable for all investors.
Please refer to the prospectus for complete information regarding all risks associated with the Trust.
Investors buy and sell shares on a secondary market (i.e., not directly from Trusts). Only market makers or authorized
participants may trade directly with the Trusts, typically in blocks of 50k to 100k shares.
Definitions: The Federal Reserve (Fed) is the central banking system of the United States of America. The European Union (EU) is a politico-economic union
of 28 member states that are located primarily in Europe. The Organization of Petroleum Exporting Countries (OPEC) is a group consisting of 12 of the
world's major oil-exporting nations. La Nina is the cooling of the water in the equatorial Pacific that occurs at irregular intervals and is associated with
widespread changes in weather patterns. Correlation is a mutual relationship or connection between two or more variables. A z-score (aka, a standard score)
indicates how many standard deviations an element is from the mean.

Commodities generally are volatile and are not suitable for all investors. This material must be accompanied or preceded by
the prospectus. Carefully consider each Trusts investment objectives, risk factors, and fees and expenses before investing.
Please click here to view the prospectus.
ALPS Distributors, Inc. is the marketing agent for ETFS Silver Trust, ETFS Gold Trust, ETFS Platinum Trust, ETFS Palladium
Trust and ETFS Precious Metals Basket Trust.
Maxwell Gold is a registered representative of ALPS Distributors, Inc.
ETF001069 12/31/17

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